It is five years ago since Stewart Ritchie, the highly regarded Scottish Equitable actuary, warned about companies offering cash incentives to members to persuade them to leave their pension schemes.
He said at the time: “We know the concept of cash-in hand inducements is becoming increasingly popular among employers trying to reduce their pension liabilities. This is clearly good for employers in controlling their future pension costs. but it is much less clear that it is good for members.”
Now pensions minister Steve Webb has entered the fray and raised concerns that people will be lured into giving up valuable pension rights for cash.
In 2007, 2008 and 2009, the regulator issued guidance to pension scheme trustees, warning them to assume that transfer incentive schemes were probably not in the interests of scheme members. Yet despite this guidance, Webb says there is evidence that a high proportion of people advised to not take a pension transfer offer will ignore that advice.
It is a worrying statement, given the continued decline of final-salary schemes – cash inducements are becoming more widespread as companies try to reduce their pension scheme liabilities.
A handful of companies in the past have tried the normal transfer route but this carrot has not surprisingly proved unsuccessful because a large number of employers will not be tempted to leave a finalsalary scheme and the benefits that come with it.
Enter the enhanced transfer value. It was the route that Intercontinental Hotels took couple of years. It offered its deferred members 25 per cent cash lump sum on top of the normal transfer value. The group will not say how many members took up the scheme but said it paid out £10m in ETVs, which was what it had expected to pay out in total.
It is easy to see why companies offering them are under pressure to offer incentives to deferred members. In a clear illustration of how unaffordable defined-benefit schemes have become for many companies, KPMG’s fifth annual Pensions Repayment Monitor has found that, for the first time, FTSE 100 companies are now spending more on deficits than funding pensions for current staff. Nearly £2 out of every £3 spent in 2009 went on deficit reduction.
Last month, it emerged that the pension division of accountancy firm PricewaterhouseCoopers has devised a new scheme called the new total pension increase exchange and said one of the UK’s biggest companies is poised to launch, with other big employers set to follow.
PwC said this offers an opportunity for those between 55 and the company’s normal pension age, particularly former employees or those facing early retirement, to take a transfer in a way which benefits them and the employer.
The company pays them an enhanced transfer value, which is more than the minimum they would be strictly entitled to, although less than the fully indexed pension is worth.
This enhanced financial pot is switched to a group personal pension, which is immediately used to bulk-buy flat annuities, thereby, hopefully, achieving better terms for a group of members than individuals could negotiate on their own.
Cash may be the easier sell but you have to worry if it is in the best interests of the member to quit their index-linked company pension scheme.
It is, perhaps, premature to talk of the next pension misselling scandal but you get the feeling that the offer of ETVs will be under scrutiny for a good while. Whether consumers win or lose will depend largely on how long they live and the rate of inflation – and, not least, the quality of advice they are given.
Paul Farrow is personal finance editor of the Telegraph Media Group